DLF Hawks Luxury as Profit Drops to 6-Year Low: Corporate India

By Pooja Thakur -
Jun 28, 2012

DLF Ltd. (DLFU), India’s largest developer,
is shunning affordable housing to focus on luxury holiday homes
and land sales to boost profit from a six-year low.

DLF is constructing high-end second homes for the wealthy
in the hill stations of Shimla and Kasauli in the north Indian
state of Himachal Pradesh and in the beach resort of Goa, said
Mohit Gujral, the vice chairman of unit DLF India Ltd. It also
plans to boost revenue from offering land and plots, DLF told
analysts on May 31. It earned 17 percent of its 2011 revenue
from land sales, according to data compiled by Bloomberg.

Billionaire Chairman Kushal Pal Singh faced with four
straight years of declining profit is focusing on businesses
that may help the company improve margins and selling assets
including hotels and windmill operations. DLF is betting that
the villas sold at prices that can fetch a condominium in
Manhattan will help it counter rising costs of steel and cement
that have propelled the company’s costs to a record.

“Over the past year and a half, their preference has been
to defend margins over chasing volumes,” said Bhaskar Chakraborty, an analyst at Mumbai-based brokerage IIFL Ltd.
“The market doesn’t care if he chooses a higher margin-lower
volume or a higher volume-lower margin business as long as his
operating metrics improve, which hasn’t happened.”

DLF, based in New Delhi, has gained 5 percent this year,
underperforming the benchmark BSE India Sensitive Index, which
has risen 10 percent. The stock was replaced by Dr. Reddy’s
Laboratories Ltd. in the gauge on June 11. It rose 1.2 percent
to 194.45 rupees in Mumbai, its highest in almost two weeks.

‘Evolving Lifestyle’

DLF’s holiday villas in Shimla, India’s summer capital
during British colonial rule, sell for about 40 million rupees
($700,000), Gujral said in an interview on June 25. The median
price of a Manhattan condominium was at $775,000 in the first
quarter, Miller Samuel Inc. and Prudential Douglas Elliman Real
Estate said in an April 3 report.

In contrast, DLF is selling homes in Bangalore for between
2.5 million rupees and 3 million rupees, its first attempt to
offer affordable housing in the country, he said. The company
plans to complete its affordable housing project spread over 88
acres (36 hectares) in Bangalore in five years, he said.

“India is evolving and we believe the time and market has
come for a lifestyle second home,” said Gujral, who also
manages DLF’s businesses in north and south India. “Some
companies do luxury very well and some do volume products very
well; we want to be in the medium and upper end, not the lowest
end of the spectrum.”

‘Sama’ Villas

The developer said on May 30 fourth-quarter profit declined
39 percent to 2.12 billion rupees from a year ago. Full-year net
income dropped 27 percent to a six-year low of 12 billion
rupees. Costs rose 17 percent to 24.5 billion rupees. The
company’s operating margin was at 33.4 percent in the period.

The company reported a total debt of 202.2 billion rupees
in the three months ended March 31, data compiled by Bloomberg
show. DLF plans to raise 70 billion rupees selling assets to pay
debt in the next three years.

The company, which developed upscale south Delhi localities
including Greater Kailash, Hauz Khas and South Extension, is
also selling land to avoid the cost of constructing homes. About
17 percent, or 15.9 billion rupees, of its revenue came from
land sales in the year to March 2011 from just 1.5 percent a
year earlier, according to data compiled by Bloomberg.

Unattractive Investment

Building costs for developers are “staggering,” with the
price of construction per square foot climbing 20 percent from a
year ago, Shobhit Agarwal, joint managing director of capital
markets at Jones Lang LaSalle India said. Low returns and higher
gestation periods for affordable projects make them unattractive
for investment, he said.

“International and domestic funds have clearly lost their
taste for affordable housing,” Agarwal said. “This yesteryear
poster boy of the Indian real estate story has fallen off the
capital markets hit parade because of the low returns it yields
and the higher gestation period involved.”

DLF is offering the holiday homes on the hillsides of India
under the name “Sama,” which means tranquility in Sanskrit. It
has sold its 24 villa-project “Samatara” in Shimla and has
started sales of its luxury project at Kasauli, another hill
town about 77 kilometers (48 miles) from Shimla.

The 100-home development, with plots ranging from 500
square yards to 1400 square yards on 60 acres of land, will be
completed in about three years. The gated 40-acre project in
Goa, a 45 minutes flight from Mumbai, will be marketed by the
end of the year, Gujral said.

‘Volume Game’

The company, set up in 1946 as Delhi Land & Finance Pvt.,
is completing the affordable housing project in Bangalore after
raising funds from private equity investors in 2007. Since then,
land prices have climbed as the areas have become more urbanized
and it has now become difficult to justify low-end projects at
the sites, Gujral said.

“To make affordable housing successful, the government
will need to provide infrastructure, speedier approvals and
subsidized land” to make it viable for developers, said Anuj Puri, chairman at Jones Lang LaSalle India.

DLF expects the wealthy in Asia’s third-largest economy to
splurge even after gross domestic product grew at the slowest
pace in nine years in the quarter ended March 31. India’s wealth
assets are estimated to double over the next five years,
according to a Julius Baer Group report in August. The country’s
wealthy will more than double to 400,000 by 2015, according to
the report.

Demand for luxury homes and goods are not “that
sensitive,” Gujral said. “We aren’t in the volume game.”